Colombia’s Deteriorating Security Outlook Could Impair Ronda Colombia’s Outcome

Colombia’s security environment is swiftly deteriorating as the Colombian government aggressively offers more than a hundred oil and gas exploration and production blocks in the Ronda Colombia 2012 bidding process. Oil and gas exploration is a key driver of the Colombian government’s revenue. A deteriorating security outlook could disincentive investors interested in bidding for the blocks offered in in key areas such as the Caguán-Putumayo basin.

Left-wing guerrillas have wreaked havoc in Bogotá, Caquetá, Guajira, Putumayo, and more recently in Cauca (where indigenous groups have strongly opposed the presence of armed groups). Analysts are divided about what is causing the Fuerzas Armadas Revolucionarias (FARC) and, to a lesser extent, the Ejercito de Liberación Nacional’s (ELN) recent blows to the Colombian Army, the Police force, and the country’s infrastructure. Some analysts believe this upsurge in guerrilla attacks is a defensive strategy amid the heavy military pressure of the Colombian state on areas where the guerrillas have historically been strongest, such as Caquetá in the case of the FARC. Other analysts, however, argue the uptick in guerrilla activity is the result of the government’s lack of military initiative and of the government’s military fatigue. Regardless of the cause, an emboldened guerrilla does not bode well for the outcome of the Ronda Colombia 2012, a bidding round of over a hundred exploration and production blocks in mature areas, new frontier basins, and areas with little geological knowledge.

The FARC and ELN guerrillas each have affected key oil infrastructure like the Caño-Limón and Oleoducto Transandino pipelines, which bring hydrocarbons to market through ports in the Atlantic and the Pacific coast, respectively. The rebels have also targeted railways transporting coal mined in the departments of La Guajira and Cesar. These attacks have not only affected production targets, but they are now forcing key players to re-evaluate their investment decisions. Gran Tierra Energy (GTE:CN), with assets in the rugged Caguán -Putumayo basin in southwestern Colombia, cut its capital expenditure budget by 14 percent for the remaining of this year in response to production constraints resulting from the guerrilla’s attacks on oil infrastructure. If decisions like this one are any indicator of what investor offers in the Caguán-Putumayo basin would look like, Colombian officials must be starting to feel strong shivers down their spines.  Continue reading

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Romeo Langlois Releases Video, Colombian Conflict Reality and Military Slip-UP

On June 20, 2012, French reporter Romeo Langlois released the shocking video of the FARC guerrillas’ ambush of the Colombian Army unit he was embedded with last month. The FARC retained Langlois for a month, after he turned himself into the terrorist group to save his life. The army unit was raiding cocaine labs located in two different areas of Caquetá, in southeastern Colombia. This video not only provides evidence of the reality of the Colombian conflict, but also proves the inexistence of a protocol regarding embedded reporters in Colombia.

The video is shocking. Langlois shares a few hours of his life accompanying Colombian Army men carrying out a routine, yet risky operation. In the video, Continue reading

May in Colombia: Juan Manuel Santos’ Most Difficult Month

What does a good month in Colombia look like? Well, the opposite of what we saw this past May. The Colombian government wanted ongoing investor confidence to remind everyone about the country’s progress, but an attack against a conservative former minister, and the capture of a French journalist by the leftwing FARC guerrillas revealed the contrary. In Colombia, security remains a weak spot. Colombia is on a positive path, but its government should not be too confident about the country’s success

Colombia has made progress on its security and economic fronts. A stronger police force, a better military, and more effective, yet still subpar government institutions have combined to wage an effective war against left-wing guerrillas, right-wing paramilitaries, and drug-trafficking organizations. Although much still needs to be done, Colombia is no longer seen as a failed state. But, illegal groups still have a presence in remote and strategic areas of the country.

Improved security and a well-managed economy are the anchors of an average GDP growth rate of over 4 percent in the last decade, compared to a regional 3.4 percent. Foreign direct investment (FDI) has soared, reaching $13 billion in 2011. Close to 40% of these flows went to the oil industry as a result of improved control over the territory, a successful oil sector reform, and high commodity prices. Against this backdrop, throughout the month of May, Colombia wanted to celebrate ongoing investor confidence and the taking off of the long awaited U.S.-Colombia trade agreement.

Indeed, last month the Santos administration organized several events to celebrate the U.S.-Colombia trade agreement, the country’s economic stability, and Colombia’s security achievements. On May 15th, the day the trade agreement finally took effect, the port of Continue reading

What the Decriminalization/Legalization of Drugs Debate is Missing

The legalization of soft and hard drugs made headlines recently, yet this debate is still poorly framed. Two sitting presidents, Otto Perez Molina from Guatemala and Juan Manuel Santos from Colombia, stated that head-on regional and world discussions about the narcotics issue are past due and that it is time now to re-assess the failed war on drugs, shifting towards decriminalization or legalization of soft and hard drugs. While Perez boldly favored legalization of drug consumption and legalization of production and transportation logistics in Central America, Santos tamely supported decriminalization of consumption of some drugs, like cocaine, but not all. The presidents’ statements echoed those of leading Latin American authors Sergio Ramirez and Carlos Fuentes and that of the Latin American Commission of Drugs and Democracy, presided by former presidents Cesar Gaviria (Colombia), Fernando Henrique Cardoso (Brazil) and Ernesto Zedillo (Mexico).

The presidents’ call for a debate about decriminalizing or legalizing drugs (soft and hard) is welcome. But both Perez and Santos’ statements
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Macro confidence and the scourge of corruption in Bogota and Colombia

Standard and Poor’s upgraded Colombia’s foreign denominated debt rating to investment grade last week. The rating agency’s decision boosts market confidence in Colombia amid responsible macroeconomic management. Good macro management should come hand in hand with eradicating corruption practices in public and private transactions, as the ongoing corruption scandals in Bogota and across the country belie. Otherwise, the continued pilfering of public monies threatens to become a fiscal burden and an obstacle for conducting business.

S&Ps’ decision, expected by Colombian policymakers and long-internalized by markets as a result of the agency’s 2010 upward outlook for Colombia, reflects the relative sound macroeconomic environment of the Andean country. Credit agencies downgraded Colombia’s rating twelve years ago after the country underwent a banking and mortgage crisis. Increased insecurity and alleged inability of the government to control its territory also contributed to the downgrade. But unlike ArgentinaEcuador, and Venezuela, Colombia has had a historical responsible macroeconomic management, a solid independent Central Bank, and a credible commitment to service its obligations.

The upgrade comes despite implementation of pending macroeconomic reforms. Although fiscal policy still is moderately inflexible thanks to numerous constitutionally mandated obligations, Continue reading

Royalties reform in Colombia

Increasing opposition to a constitutional reform that would change the regional distribution of oil and mining royalties is emerging in Colombia’s Congress as the bill makes its way through the legislature. Senator Juan Lozano, the president of Juan Manuel Santos’ Partido de la U, argued in a debate last night in the Senate that there should be a discussion on current tax benefits granted to extractive companies. Lozano’s statement echoed that of Senator Jorge Robledo from opposition party PDA. Robledo also argued that the bill seeks to centralize management of royalties in the hands of the national government  to cover its deficit.

Finance Minister Juan Carlos Echeverry highlighted that Colombia’s government does not plan to modify royalty rates and that the bill in discussion would contribute to a more equitable distribution of royalties among sub-national governments, both for producers and for non-producers. Echeverry clarified that the national budget will not benefit from any changes in the royalties regime. This is the second of eight debates. The debate was postponed late last night and will resume today. The government will continue to face strong opposition, in particular once the bill reaches the lower Chamber’s floor in the third and fourth debates and legislators are preparing to support candidates for local elections in 2011. Royalties are a significant component of the income of sub-national government. Colombia’s government expects to receive COP 8 trillion in oil and mining royalties this year.

Ecopetrol and PDVSA’s Orinoco joint exploration

Carlos Rodado, Colombian Mining and Energy Minister, announced possible joint exploration of the Orinoco basin by Colombia’s Ecopetrol and Venezuela’s PDVSA. According to Colombia’s leading think tank Fedesarrollo, in 2009 Colombia extracted 66.45 percent (425 thousand b/a) of its oil from the fields in its side of the basin, which accounts for 30 percent of the basin’s area with the remainder on Venezuelan territory. Rodado’s statement comes after high-level bilateral meetings that resumed diplomatic and trade relations between the two neighboring countries, stalled after political rifts grounded on evidence of Venezuela’s support and protection of Colombia’s FARC, a left-wing terrorist organization.

Will the joint exploration come to reality? Both companies are state-owned, however their management motivations are radically different. While Ecopetrol acts independently, PDVSA operates driven by political motivations fitting clearly into state-capitalismwhere businesses’ drivers are “maximizing the state’s power and the leadership’s chances of survival”, as oppose to profit/growth maximization. Ecopetrol, a majority state-owned company, is a solid and well-governed company. Ecopetrol’s management independently decides about its investments based on project assessment without affecting Colombia’s fiscal position. The company is listed on the NYSE (EC) and, most recently, on the Toronto’s Stock Exchange. Ecopetrol’s share has performed positively, increasing value both in USD and COP, which has not been the case of other players such as Brazil’s Petrobras whose share has declined since January, according to Brooking’s Mauricio Cárdenas Santamaria.

PDVSA… well, is the opposite of Ecopetrol. The highly in-depth state owned company is crucial in Venezuela’s Hugo Chávez regime. Not surprisingly, the company’s CEO is also the head of the Ministry of Energy and Oil and one of PDV’s vice-presidents is Chavez’s brother. The company’s funds most of Venezuela’s “social” programs, which guarantee people’s support for Hugo Chávez.  PDVSA, more over, has unsuccessfully taken over several other nationalized companies in the sector.

Whether or not the joint exploration crystallizes, Ecopetrol should be wary of its business partner.